History of Roth 401k Retirement Accounts

• Although not officially unveiled until 2006, Roth 401k accounts were authorized by the landmark EGTRRA (tax reconciliation act) passed by Congress in 2001. They were designed to offer an additional retirement account choice for the self-employed and those with higher incomes.
  
  

Differences between Traditional 401k and Roth 401k Accounts

• The fact that a Roth account is funded with after-tax contributions and a regular 401k is funded by a pre-tax contributions is the key distinction between the two types of retirement accounts, and leads to differences in contribution limits and the tax treatments of the two types of accounts, especially in regard to early withdrawals.
  
  

Early Withdrawal Penalties on Roth 401k Accounts

• Unlike traditional 401k accounts, where all nonexempt early withdrawals (before age 59½) are automatically assessed a 10 percent early withdrawal penalty, Roth account holders can withdraw any amount up to the amount of their contributions without penalty. However, Roth account holders do have to pay a 10 percent early withdrawal penalty on any amounts withdrawn above their contributions (i.e., untaxed income). Say, for example, a Roth account had contributions of $20,000 but had reached a total value of $30,000. The account holder could withdraw up to $20,000 without penalty, but if she withdrew $25,000 then she would owe a 10 percent penalty on the $5,000 withdrawn above the original contributions, or $500.
  
  

Exemptions for 401k Early Withdrawal Penalty

• Roth 401k accounts enjoy the same exemptions from the early withdrawal penalties as do traditional 401k accounts, including qualified educational or medical expenses. However, Roth 401ks do not enjoy the first-time homeowner withdrawal exemption that can be used by traditional 401k holders.